New York Markets After Hours

Cable access ruling no pancea for AOL

CBS.MarketWatch.com

PORTLAND, Ore. (CBS.MW) -- A federal judge in Oregon ruled Friday that AT&T must open its cable lines to rival Internet access providers, handing America Online and other Net companies a victory in their bid to offer high-speed Web services.

U.S. District Court Judge Owen Panner's decision only affects the Portland area, but analysts said companies will seize on the ruling as a precedent they can use elsewhere to exploit cable lines for Internet services. AT&T said the ruling was "inexplicable" and vowed to appeal.

"The dam is cracking (for AtHome)," said Anthony Stoss of Southeast Research Partners. "The stage is set for other Internet service providers to lobby for open access as well."

AT&T now offers high-speed cable Internet service in a small number of its territories through ExciteAtHome and it's upgrading the rest of its cable lines to offer such service as well.

AOL and other ISPs fear that without cheap access to AT&T's lines, they'll lose customers as consumers switch from slow 28K and 56K modems to the speedier cable connections, which many analysts believe will dominate in the next century. AOL has deals to offer high-speed service over the phone lines of the local Bell carriers, but thicker cable wires potentially can carry more data at greater speeds.

Slow crawl

Yet while the ruling is significant, it still doesn't guarantee AOL and other ISPs a high perch in the fast-approaching world of ubiquitious high-speed Internet access.

The June 4 ruling only covers the municipality of Portland, Oregon, though other cities and towns could follow suit. Still, with AT&T planning to contest that ruling (and others), it could take years for the issue to be resolved, at great cost and delays to Internet service providers.

"Trying to get nationwide policy done on a statewide basis is a laborious process," said George Reed-Dellinger, a telecom analyst at HSBC Washington Analysis who covers regulatory issues. AOL would also have to persuade thousands of municipalities to join its cause, some of which are unlikely to do so, he noted.

To avoid such an ordeal, AOL has been badgering federal regulators to force AT&T to open its cable lines on a nationwide basis, but so far they have balked.

The Federal Communications Commission is feeling pressure from Congress to spur competition in the monopolistic local phone market. AT&T's move into the cable business -- it will potentially have access to 60 percent of all American homes -- will do just that since Ma Bell also plans to offer phone service.

At the same time, however, AT&T is acquiring a near-monopolistic position in high-speed cable Internet access. FCC officials appear sympathetic to the concerns of AOL and others, but are unsure about their jurisdiction and worry about a backlash from a anti-regulatory Congress. So it's been hands off for now.

For that reason, the financial markets assumed regulators didn't have the authority -- or guts -- to tackle the issue, lifting AtHome's stock and weighing down on AOL.

The next round

The Portland ruling certainly changes the equation. Scott Cleland, a regulatory expert at Legg Mason Precursor Group, calls the judge's decision "significant" and says odds favor that it will be upheld on appeal.

"The federal District Court has ruled, definitively until appealed, that cities across the country have the authority to require open access," he said.

Of course, AT&T plans to fight.

"Today's decision is inexplicable," said Mark Rosenblum, AT&T vice president of law. "The actions taken by officials of Portland and Multnomah County are beyond the legal authority municipalities have to review cable franchise transfers. Clearly we will continue to pursue our legal case."

AT&T acquired the Portland cable franchise through its purchase earlier this year of Tele-Communications Inc. As a condition for approval, city officials had demanded that AT&T allow open access, a position the carrier refused.

AT&T has repeatedly said that requiring open access could limit its potential profits and thus crimp spending on the upgrades that would allow the rest of its cable network to offer phone and high-speed Internet service. With the company already in the hock for more than $110 billion in cable purchases, however, analysts doubt AT&T will all of sudden slash spending on cable upgrades.

At what price, access

Left unanswered in the judge's ruling is another, perhaps more critical, issue: how much should AT&T be allowed to charge for access to its cable lines. AT&T could charge such a high amount, for example, that it would still be cheaper for consumers to purchase its AtHome cable Internet service than that of a rival provider like AOL.

If that happens, ISPs would likely have to go back to court again to persuade the judge to set limits on how much AT&T could charge.

For AT&T, the ruling is much less of blow than it is to AtHome. Even if it eventually loses the appeal -- a process that could take up to a year or more -- the company still stands to profit handsomely. Rivals ISPs will have to pay up no matter what.

"Nobody is asking AT&T to give away their access. Let AT&T make a fortune charging access. The customers will win. The competitors will win. And AT&T will win," said Jeffrey Kagan, an independent telecom analyst based in Atlanta. "The only negative is from AT&T's perspective in that they have to let competitors use their facilities."

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